On April 20, 2016, Pirelli, the fifth largest tire manufacturer worldwide, announced an additional investment of US$200 million in Mexico, over the next three years. Two weeks before, Ford Motor Co. confirmed an investment of $1.6 billion to build a new factory in Mexico. And the giant biopharmaceutical firm AstraZeneca just opened a Global Technology Center (GTC) in Mexico, with a $12-million investment, to match the company’s GTC in India, to serve the Americas markets with more flexibility.

In 2015, foreign direct investment (FDI) in Mexico rose 25 percent, reaching $28 billion, mainly because of AT&T’s $2-billion acquisition of Mexican wireless operators Iusacell and Unefon, and the $2.15-billion purchase of Vitro’s glass container business by the US Company Owens-Illinois Inc.

Why do so many global companies continue to land in Mexico, despite the country’s negative image in the international media, due to the drug war? Why is Mexico considered by investors as a country worth looking at?

The NAFTA region represents a potential market of about $20 trillion, greater than the economic output of the 28 countries in the European Union.

Search for “Mexico’s advantages” on the Internet, and many articles include the five, seven or 10 reasons why investing in this emerging country makes sense, among them geographic location, free trade agreements, young population, cheap labor, market size and, more recently, structural reforms.

Beyond all these real advantages, Mexico also has demonstrated its great ability as a country to become one of the world’s leading car producers and a powerful export machine. How was this possible? There are some specific aspects have helped Mexico to become a key player in the global value chains.

Too Big to Ignore

One is the importance for Mexico of being part of the North American Free Trade Agreement (NAFTA). The NAFTA region represents a potential market of about $20 trillion, greater than the economic output of the 28 countries in the European Union, according to the CIA World Factbook 2015. One important factor for site selection is this market size. Most of the global manufacturing companies established in the Mexican territory are looking for access to the US market.

Costs are also important. With the reduction of import tariffs, NAFTA has lowered the import prices from the three country members, thereby contributing to a productivity increase in the region. In terms of international transportation, the possibility to deliver directly to the customer in a more flexible way, with less inventory, has pushed logistics costs and uncertainty down.

NAFTA has also provided impartial legal mechanisms for dispute resolutions, reducing the risk costs of doing business. Another important reason is that the NAFTA has made possible the alignment of main macroeconomic variables among the three country members, such as inflation and interest rates, giving greater long-term economic certainty to investors. That is why, according to AlixPartners Manufacturing Outsourcing Cost Index, Mexico is now among the least expensive countries for the manufacture of US-bound products.

According to the Boston Consulting Group, in 2015, manufacturing costs in Mexico were 4 percent lower than in China.

Another aspect considered by investors is the ability of Mexico to integrate successfully the country’s production capacity to regional production chains of high-added-value industries, such as automotive and aerospace. For instance, vehicles made in North America have a great number of parts, sourced from Canada, Mexico or the United States, driving costs down. Cheaper labor costs in Mexico have encouraged global automakers to expand their production in the country to increase profitability. According to the Boston Consulting Group, in 2015, manufacturing costs in Mexico were 4 percent lower than in China.

Global Network

But if costs were the only factor to attract new automotive companies, most of these global companies probably would have gone to cheaper regions, such as Central America.

Why then is Mexico the fourth largest exporter and seventh largest vehicle manufacturer in the world? Why is the aerospace industry is growing more and more important in the country? One of the answers is that the wide network of free trade agreements with 45 countries, besides NAFTA, facilitates foreign trade and also the arrival of global suppliers participating in just-in-time and just-in-sequence production processes, converting the country into a very attractive platform for large anchor companies.

With energy reforms and the loss of the government monopoly, Mexico expects to lower the cost of electricity, which now is almost five dollars higher per megawatt than the cost in the US.

According to data from the National Industrial Auto parts association (INA), there are about 2,500 auto parts suppliers in Mexico from Tier 1, Tier 2 and Tier 3 levels of production, organized in local clusters whose main mission is to develop efficiency and specialization to reinforce high quality standards in vertical production chains.

To some this aerial photo of a new bypass in East Chihuahua may look like mere desert. To industrial end users it looks like the sort of infrastructure that supports a profit-making supply chain.

Photo courtesy of Mexican Secretariat of Communications and Transport

The existence of world-class industrial parks has also been a major factor to make possible exponential economic development surrounding major assemblers. This is the case with the Mazda and Honda plants in Guanajuato, the Nissan plant in Aguascalientes, the Volkswagen and Audi plants in Puebla, the GM plants in Guanajuato and San Luis Potosí, as well as the Kia plant in Nuevo León, among others.

According to the Mexican Federation of the Aerospace Industry (FEMIA), in the aerospace industry, there are more than 300 suppliers in Mexico, participating in manufacturing, aircraft maintenance, repair, overhaul, engineering and design, with capacity to produce aircraft components, composite airframes and micro-tolerance turbine parts.

Knowledge and Reforms

Investors assess as well the capacity of Mexico’s workforce to provide the managerial and technical skills, as a strategic support for the several manufacturing industries operating in the country. During the past decade, state governments have made important efforts to create training schools and technical and specialized universities — such as the aerospace university in Queretaro — to meet the demand of human resources at automotive and aerospace companies in Mexico. According to the World Economic Forum, Mexico is among the 10 top countries in engineers produced annually, with almost 144,000 graduates in 2015. In addition, Mexican workers are well known for being very productive compared to other countries, in terms of talent management, turnover, cost of human resources and the cost of human capital (Saratoga Study, PricewaterhouseCoopers 2014).

According to the World Economic Forum, Mexico is among the 10 top countries in engineers produced annually, with almost 144,000 graduates in 2015.

Complementing the above competitive advantages, the Mexican government has been able to pass long-awaited structural reforms in education, communications, finance, energy, fiscal policy and elections rules, with the expectation of boosting economic growth in the coming years.

With the energy reform, which considers the end of the Federal Electricity Commission’s monopoly and the participation of the private sector, Mexico expects to lower the cost of electricity, which now is almost five dollars higher per megawatt than the cost in the US. At the same time, the government seeks to increase the supply of natural gas through a more efficient pipeline system. These initiatives will give Mexico the opportunity to offer to foreign investors a significant energy-cost advantage over most other exporting economies. Cheaper Mexican energy will likewise help local firms to become globally competitive. Now the challenge is to implement all these reforms in the mid-term.

Claudia Avila Connelly

No doubt, Mexico is an attractive country for investments. With 118 million inhabitants, and a GDP of about $1.37 trillion in 2015, the country is one of the largest emerging economies in Latin America and in the world. However, for Mexico to strengthen the country’s position as a rising star of global manufacturing, it is still necessary to improve the business environment, with more transparency and efficiency in institutions to better enforce regulations and procedures. That will be our main challenge in the near future.

Dr. Claudia Avila Connelly is the executive director of the Mexican Association of Industrial Parks (AMPIP), with 28 years’ experience in international business promotion in both the private and public sectors.

DAB Developers

We All Have Room for Improvement

The George W. Bush Institute created the North America Competitiveness Scorecard as a tool to compare the competitive position of the United States, Canada, and Mexico, as a region, relative to other major economic regions and countries with large economies. In releasing the scorecard in November 2015, the Institute gave Mexico a C grade overall (Canada and the US received As) across five metrics tracked by the World Bank, World Economic Forum, Fraser Institute, and the Heritage Foundation/Wall Street Journal, with the highest grade in the category of “investment environment.”

“Mexico rates highly on measures of ease of obtaining credit and freedom to trade internationally, and is one of the most promising emerging markets in the world today, thanks to the far-reaching economic policy reforms of the past several years,” said the scorecard.

In terms of room for improvement, all three nations have some things to work on: “The US must improve its fiscal responsibility, reduce its relative indebtedness and restore confidence in its long-term macroeconomic outlook,” said the scorecard. “Above all else, Mexico needs to improve rule of law and reduce corruption. Canada lags in innovation and technology transfer and is hampered by cumbersome business regulations.”

El Florido

The Offshore Group

Formulas for Reform

Following is an abridged version of early April commentary from the Hon. Antonio Garza, the retired US ambassador to Mexico who now serves as counsel in the Mexico City office of global law firm White & Case LLP. Garza also is chairman of Vianovo Ventures, a management consultancy with a focus on cross-border business development.

This past month, Mexico’s civil society groups handed the Senate president a new piece of anti-corruption legislation — the Ley3de3. The citizen-led legislation looks to force public officials to disclose tax information and possible conflicts of interest, and increases the punishment for acts of corruption. After a widespread media campaign, the bill received 291,467 signatures (more than double the 120,000 signatures necessary to get it onto the legislative table), representing a new path for the country’s civil society to influence the anti-corruption agenda.

There have also been steps forward for Mexico’s energy reform. This past week, the Federal Electricity Commission (CFE) held its first long-term electricity tender with ultimately 11 companies (out of 69 bidders) winning clean energy certificates and electricity contracts. The government’s goal is to have clean energy contracts producing 5 percent of the country’s electricity in the next two years. Meanwhile on the oil and gas side, the reform is also continuing apace, despite Moody’s downgrade of Pemex’s credit rating (along with Mexico’s general outlook) this past week due to its precarious financials. The next tender will be for deepwater exploration and production, and is scheduled for the first week in December.

— Antonio Garza

Rio Grande City

Survey Says:

By Doug Donahue, Vice President Business Development, Entrada Group

Perceptions Don’t Match Reality When it Comes to Manufacturing in Mexico

An open-trade philosophy, proximity to US, South American and Canadian markets, and cost-effective and highly-skilled labor are all factors in favor of Mexican manufacturing. Yet despite growing awareness of Mexico’s advantages, many manufacturers have hesitated to establish their own production footprint in the country. The rationale behind this sentiment is explored in a recent report “Mexico’s Automotive Manufacturing — Incentives & Barriers,” based on a survey conducted by Entrada Group, a US-based company that helps manufacturers quickly establish their own highly productive operations in Mexico.

Mexico’s Strengths

According to industry analysts, approximately 40% of North American auto manufacturing jobs are in Mexico. The nation is quickly becoming a hub for international OEMs from the U.S., Europe and Asia. For example, in 2014, BMW announced construction of its new plant in San Luis, Potosi, for the 3 Series, with an estimated launch in 2018. This March, Ford announced plans to build a $1.6 billion new car plant in San Luis Potosi, creating 2,800 jobs by 2020.

Survey results show that 45% of respondents not currently operating in Mexico cite the “lack of knowledge about regions of Mexico” as a significant factor discouraging entry. 90% of respondents already operating in Mexico say a strong supply base is “very important.” Yet only 17% of these respondents rate Mexico’s supply base as “excellent.” This indicates a need for higher-quality suppliers to establish a production footprint in Mexico.

Further, Mexico remains a very cost-effective production location, primarily due to affordable and highly-skilled labor. Depending on the region of Mexico, hourly labor rates for indirect workers can rival hourly costs in parts of China, according to a study by Boston Consulting Group.

Entrada Group Survey Reveals Common Barriers to Mexico

While these strengths of Mexico manufacturing are well known, common obstacles keep some producers from entering Mexico. These obstacles are the main focus of Entrada Group’s survey, conducted late in 2015.

Survey respondents were asked about their priorities and experiences, as well as their perceptions, about operating in Mexico. Collectively, their responses illustrate some common opinions about Mexico that don’t always match reality on the ground.

And while respondents currently lacking Mexico operations are deterred by a broad array of barriers to entry (from security to recruitment), no single concern dominates. These add up to a net feeling, particularly for smaller companies, that entry into Mexico is too risky and daunting. The top concerns respondents cited were security, lack of “Mexico know-how,” and talent shortages, as the report details.

Opinions of Producers Already in Mexico

Another key finding of the survey came from producers already established in Mexico. Nearly 90% of this group indicate a strong supply base is “very important.” Yet only 17% of these respondents rate Mexico’s supply base as “excellent,” with nearly a quarter considering it “poor.”

This suggests plenty of room for improvement with respect to Mexico’s in-country supply base, as well as plenty of opportunity for suppliers that are considering establishing their own Mexico operations.

Opportunity for Expansion

Another key finding in the survey pertains to customer makeup for Mexican-based producers. Respondents indicate they produce for customers from a range of industries, not exclusively within the auto sector. Mexico hosts a strong network of OEMs and large Tier 1 suppliers across a wide range of industries. To stay ahead of ever-changing free-trade requirements, these companies aim to increase their percentage of value-added services/production in Mexico. In other words, suppliers still contemplating a production footprint in Mexico will find opportunities in other sectors outside of automotive (industrial, aerospace, medical device, etc.).

The benefits that Mexico offers to manufacturers are clear: Competitive wages, growth prospects thanks to an open-trade philosophy, reliable infrastructure, proximity to the U.S., an educated workforce and a growing supplier base. These factors combine to make Mexico a location any manufacturer seeking growth has to consider. To download a copy of the complete report, visit www.entradagroup.com and browse to White Papers.

Growing Greener

Ware Malcomb, an award-winning international design firm, and Corporación Inmobiliaria Vesta, S.A.B. de C.V. (“Vesta”), a leader in the development of industrial buildings and distribution centers in Mexico, in March announced construction is complete and certifications are in progress on the new Vesta corporate headquarters located at Arcos Bosques in Bosque de las Lomas in Ciudad de México, Mexico. Ware Malcomb provided full service interior design, branding and construction management services for the project.

The 900-sq.-m. (9,688-sq.-ft.) project is pursuing LEED ID+C Platinum certification from the U.S. Green Building Council, as well as WELL BUILDING STANDARD® Gold certification from the International WELL Building Institute, the first tenant improvement project in Mexico to be built to this specification. WELL is the world’s first building standard focused on human health and wellness, setting performance requirements in seven categories relevant to occupant health in the built environment.

“Our new corporate headquarters reflects our brand, quality, high service standards, contemporary aesthetics, and dedication to excellence,” said Lorenzo Berho, chairman and CEO of Vesta.

“It is an exciting opportunity to design the corporate headquarters of not only one of the most important developers in Mexico, but our first client here. We have worked with Vesta over the past 10 years, and continue to work with them throughout Mexico,” said Andres Galvis, regional director of Latin America for Ware Malcomb. Ware Malcomb recently completed the design of 10 industrial buildings for Vesta across Mexico in Tijuana, Queretaro, Guanajuato, Puebla and San Luis Potosi, totaling over 150,374 sq. m. (1.6 million sq. ft.).

Galvis also noted that “as the first tenant improvement project in Mexico to seek WELL certification, along with LEED, this building is an important symbol of the future of commercial construction across the country.”